Despite surging home prices, the housing industry is showing no signs of slowing down, thanks to robust demand from homeowners. Given this backdrop, it could be wise to invest in fundamentally sound homebuilder stocks Toll Brothers, Inc. (TOL), Taylor Morrison Home Corporation (TMHC), and M/I Homes, Inc. (MHO), which are trading at a discount relative to their peers.
In the light of prevailing market tantrums, the homebuilding sector has remained surprisingly resilient, as evident by the iShares U.S. Home Construction ETF’s (ITB) 64.2% gains over the past nine months.
According to a recent article in Axios on the housing shortage, Freddie Mac estimates were 3.8 million housing units short, keeping the home prices high. Higher home prices can lead to higher profit margins for builders and increased demand for new construction from homebuyers looking for more affordable options.
The luxury housing market remains strong in the first quarter of 2023, despite the ongoing re-alignment from its overheated state of the last two years. High-net-worth consumers still consider real estate a sound investment, leading to an increase in demand for luxury housing.
Driven by increasing demand for luxury homes and rising infrastructure projects in developing countries, the global construction market is projected to be $10.54 trillion in 2023. Further, the market is expected to reach $16.14 trillion by 2028, growing at a CAGR of 8.9%. Moreover, the U.S. residential construction market is anticipated to register a CAGR of over 3% by 2028.
Given these growth projections, the homebuilding industry is expected to grow steadily in the upcoming years. Hence, it could be wise to add TOL, TMHC, and MHO to your portfolios for solid returns in the future.
Toll Brothers, Inc. (TOL)
TOL is engaged in designing, building, marketing, selling, and arranging to finance an array of luxury residential single-family detached homes, attached homes, rental apartments, master-planned resort-style golf, and urban communities.
On June 13, the company declared a quarterly dividend of $0.21 per share, payable to its shareholders on July 21, 2023. TOL’s four-year average dividend yield is 1.23%, and its current dividend of $0.84 translates to a 1.06% yield on prevailing prices. Also, its dividend payouts have grown at a 22.6% CAGR over the past three years and an 18.3% CAGR over the past five years.
On March 21, TOL announced a new joint venture with Harris Realty Company LLC, through its Toll Brothers Apartment Living rental division, to develop Piper, a six-story, 393-unit multi-family rental community in Norwalk, Connecticut.
The community will feature high-end luxury finishes and a best-in-class amenity package, which is expected to attract robust consumer demand. Also, the project expands the company’s portfolio of luxury rental communities across the Northeast.
In terms of forward non-GAAP P/E, TOL is trading at 7.37x, 49.4% lower than the industry average of 14.58x. Its forward EV/EBITDA multiple of 6.15 is 35.9% lower than the industry average of 9.60x. In addition, TOL’s forward Price/Book ratio of 1.27 is 50.9% lower than the industry average of 2.58.
TOL’s revenue increased 10.1% year-over-year to $2.51 billion for the second quarter that ended on April 30, 2023. The company’s income from operations improved 51.1% from the year-ago value to $425.71 million, while its net income grew 45.2% from the prior-year quarter to $320.22 million. Also, its EPS stood at $2.85, up 54.1% year-over-year for the same period.
Street expects TOL’s EPS to increase 22.2% year-over-year to $2.87 for the fiscal third quarter (ending July 2023), while its revenue is expected to be $2.40 billion in the same period. Moreover, the company topped the EPS estimates in each of the trailing four quarters, which is excellent.
Additionally, TOL’s net income and EBIT grew at CAGRs of 43.6% and 46.3% over the past three years, respectively. Likewise, its EPS has improved at 53.7% CAGR over the same period.
Over the past nine months, the stock has gained 88.3% to close the last trading session at $79.07.
TOL’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Growth and Value. In the B-rated 25-stock Homebuilders industry, it is ranked #2. To see additional POWR Ratings of TOL for Stability, Sentiment, and Quality, click here.
Taylor Morrison Home Corporation (TMHC)
TMHC designs, builds, and sells single and multi-family detached and attached homes; and develops lifestyle and master-planned communities. In addition, it creates and constructs multi-use properties consisting of commercial space, retail, and multi-family properties under the Urban Form brand name. Also, it offers customers financial services, title services, and homeowner’s insurance policies.
On June 26, Hello Sunshine's The Home Edit partnered with TMHC on New Home, New Zones video series designed to make moving into a new home less stressful. As part of the multi-faceted partnership, the company is also set to serve as a homebuilder in The Home Edit's latest iteration of "Extreme Makeover: Home Edition" (wt) in development at ABC.
This reflects the growing demand for the company’s offering and its expanding market reach.
TMHC’s forward non-GAAP P/E ratio of 7.18x, 50.8% lower than the industry average of 14.58x. Likewise, its forward EV/EBITDA and EV/EBIT multiples of 6.48 and 7.44 are 32.6% and 44.5% lower than the industry averages of 9.60x and 13.40x, respectively.
In the first quarter, which ended on March 31, 2023, TMHC’s total revenue amounted to $1.67 billion, while its gross margin increased marginally year-over-year to $399.57 million. Net income available to TMHC rose 8.1% from the year-ago value to $191.05 million.
Also, its EPS grew 20.8% from the prior-year quarter to $1.74. In addition, its adjusted EBITDA stood at $284.28 million, up 2.9% year-over-year.
Analysts expect TMHC’s EPS and revenue to amount to $1.69 and $1.71 billion for the second quarter (ended June 30, 2023). Its EPS is expected to increase by 3.5% per annum over the next five years. Additionally, the stock surpassed the consensus EPS estimates in each of the trailing four quarters.
TMHC’s EBITDA and net income increased at 83.7% and 54.5% CAGRs over the past three years. Over the same period, the company’s EPS improved at a CAGR of 82.8%.
The stock has gained 109.1% over the past nine months to close the last trading session at $48.77.
It’s no surprise that TMHC has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Value and Momentum and a B for Sentiment and Quality. It is ranked #3 of 25 stocks within the same B-rated industry.
In addition to the POWR Ratings we stated above, we also have TMHC’s ratings for Growth and Stability. Get all TMHC ratings here.
M/I Homes, Inc. (MHO)
MHO builds single-family homes through Northern Homebuilding; Southern Homebuilding; and Financial Services segments. It designs, constructs, markets, and sells single-family homes and attached townhomes to first-time, millennial, move-up, empty-nester, and luxury buyers under the M/I Homes brand name.
In terms of forward non-GAAP P/E, MHO is trading at 7.22x, 50.5% lower than the industry average of 14.58x. The stock’s forward EV/Sales of 0.78x is 33.1% lower than the 1.17x industry average. Furthermore, the stock’s forward EV/EBIT of 6.02x is 55.1% lower than the 13.40x industry average.
During the fiscal first quarter (ended March 31, 2023), MHO’s total revenue increased 16.2% year-over-year to $1 billion. The company’s gross margin and operating income grew 10.1% and 9.5% from the same period in the prior year to $234.63 million and $124.59 million, respectively.
Also, its EPS came in at $3.64, representing a 15.2% increase year-over-year. In addition, its adjusted EBITDA rose 8.7% from the year-ago value to $146.82 million.
MHO is expected to witness revenue and EPS growth of 6.8% and 9% for the fiscal year 2024 to reach $3.91 billion and $13.17, respectively. Moreover, the stock surpassed the consensus EPS estimates in each of the trailing four quarters.
Its EBITDA and net income grew at CAGRs of 45.8% and 52.5% over the past three years. Likewise, its EPS increased at a CAGR of 53.3% during the same period.
Over the past nine months, the stock has gained 140.7% to close the last trading session at $87.19.
MHO’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Value, Momentum, and Sentiment. In the same industry, it is ranked first among 25 stocks.
Click here to see the other ratings of MHO for Growth, Stability, and Quality.
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TOL shares were trading at $79.05 per share on Monday afternoon, down $0.02 (-0.03%). Year-to-date, TOL has gained 59.53%, versus a 16.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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